In his blog this week, Morgage broker Dennis C. Smith of Stratis Financial in Huntington Beach looks at an alternative to the short sale: the short refinance. An excerpt: 
Q.: “We are very upside down on our home we bought in 2006, with loss of overtime we are starting to feel a strong financial pinch but cannot refinance because of our home’s value and the amount we owe on the mortgage. We do not want to sell our home but are seeing fewer options. Our credit is very strong. What can we do?
A.: “If your current lender is willing to reduce the principal balance for a payoff, as they would in a short-sale situation, you may be eligible for a “short-refinance” or short-refi using FHA financing.
A short-refi works in much the same way as a short sale, except instead of selling the home to another buyer, you refinance the home to a smaller mortgage amount. The lender will take a loss on the transaction, it is up to them to decide if they will approve the reduction necessary to accommodate a short-refi. With the poor performance they are seeing on many loan modification transactions, the costs of short sale transactions they have been through and the even higher costs to the bank of foreclosures, many lenders are favorable to approving short-refi transactions.
For a short-refinance using FHA financing to go through the following must occur:
- There can be no late payments on the existing mortgage, and payments must be maintained current through the entire process.
- Lender must approve the short-refinance loan balance and pay-off of the existing mortgage.
- Lender must provide statement of “non-recourse” to borrower, meaning they will not come after the borrower for any deficiency balance after the transaction closes.
- Borrower must fully qualify for the FHA loan with full income, asset and credit documentation.
He continues:
